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Fatally Flawed

It won’t be good enough to simply revive the old financial systems – we need new lifestyles and new ways of living, writes John Sauven.

Last summer, at the Edinburgh Festival, I attended several events organised around a book festival of bankers and economists who were all launching their new tomes. They talked, with great expertise, of course, about the economy, how it works, what went wrong in 2007/2008 and what we need to do to fix it.

At the end of their various talks, up went a sea of hands for questions and, whilst almost every one of those queries was about how to green the economy, more or less every single expert had, well... nothing to say. It was as if two alien cultures had descended upon the same festival.

One of those experts was Paul Mason, economics editor at the BBC, who had written a book called Meltdown: The End of the Age of Greed. To be fair, the book itself is well worth reading, but there are just two sentences in it that relate to questions of greening the economy. Paul Mason wrote: "In previous eras, any proposal to revert to a low-growth economy would have been regarded simply as barbarism and regression. Yet there is a strong sentiment among the anti-globalisation and deep green movements in favour of this solution."

Now I'm not sure if, previously, I would ever have described Adair Turner, former boss of the CBI (the UK's premier lobbying organisation for businesses), as either anti-globalisation, or a deep green protester, yet last year he was one of those experts questioning whether one of the time-honoured drivers underpinning our society - the pursuit of 'GDP per capita growth' - is still tenable. In his contribution to a collection of essays called Do Good Lives Have to Cost the Earth? he argued that "growth has to be dethroned" if the planet is to survive surging population growth and global warming.

Similarly, that other deep green, anti-globalisation protester Nick (now Lord) Stern - a former World Bank chief economist - was recently quoted as saying that rich nations will need to reconsider making growth the goal of their societies. "At some point," he said, "we will have to think about whether we want future growth."

Across the pond, another of the defining moments of the recent financial meltdown was Alan Greenspan's testimony before a House Committee session in Washington. These are his now famous lines:

"I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

Greenspan, you may recall, is former chairman of the Federal Reserve, a prophet of deregulation, and Gordon Brown's economic adviser. During that testimony, the chairman of the House Committee pressed him further: "You found that your view of the world, your ideology, was not right - it was not working?"

Greenspan answered: "Absolutely, precisely. You know, that's precisely the reason I was shocked, because I have been going for forty years or more with very considerable evidence that it was working exceptionally well."

He went on to admit: "I made a mistake in presuming that the self-interest of banks and others was such that they were best capable of protecting their own shareholders."
As we all know, Greenspan believed not just that self-interest was the guiding principle of commerce, but that it should be seen as the guiding principle behind both reducing the role of the state in economic matters and getting rid of regulation.

Greenspan's quotes would make a good stocking filler. He once declared as myth the idea that businessmen would attempt to sell unsafe food and drugs, fraudulent securities or shoddy buildings, declaring: "It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."

And in 2005, Greenspan spoke of the "development of financial products, such as asset-backed securities, collateral loan obligations and credit default swaps, that facilitate the dispersion of risk". He went on to purport that "these increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago".

We all know that to deal with today's global problems we need an interventionist state and strong regulation and that we have to pay up today and not burden future generations with our debt. But what worries me about what we read and hear today is not "The system is bust, so let's invent a new system" but rather, "How do we revive the old one?"

If we simply re-create what went before, we end up with exactly the same problems again. The longer we leave the transformation to a low- or zero-carbon economy, the more difficult and expensive it becomes and, as we all know, the collapse of the banking system will be nothing in comparison to the collapse of the climate system.

When the financial system was at stake, our politicians took bold measures to save it. Today, when it comes to protecting the climate system, there is nowhere near the same sense of urgency, which tells me that what needs changing is politics, not the climate.

To effect this change, we will need to engage the big levers of the economy, whether private capital, taxation, public spending or industrial strategy.

There is no doubt that creating a low-carbon economy has many positives. It would, for example, balance out our over-reliance on financial services, make us more resilient to 'oil price shocks' and very likely provide new jobs. And whilst all the recent political talk has been about cuts in public spending, the public sector procurement budget - approximately £175 billion per year - still includes many large but useless big-ticket items such as Trident and super-carriers that, over their lifetime, will cost us at least £130 billion. Imagine the ships that could be built to install offshore wind farms, and the marine renewables we could develop with that kind of investment.

We need, too, a shift to green taxes, not just to raise revenue as a result of the financial meltdown, but to incentivise sustainable economic activity. If the increases in tax were on energy use, road fuel, carbon emissions, and so on, this could raise a significant proportion of the revenue required to repay the national debt, whilst simultaneously sending a price signal in the economy to improve efficiency, reduce emissions, and invest in things we will need in future like a better public transport system.

Green taxes can and should be used as an alternative to increasing other taxes and as an alternative to unnecessary cuts in public spending, yet since 1997 the proportion of government revenues derived from green taxes has actually fallen. (This is despite the New Labour government's promise, after its election victory in 1997, to bring about a tax shift, with less taxation on the 'goods' of labour and profits, and more taxes on the 'bads' of pollution and resource depletion.

The Stern Review, published in 2006, advocated three kinds of policy to reduce CO2 emissions: carbon pricing, technology stimulation, and removal of the barriers to behaviour change. Green tax acts on all three. It prices carbon. It stimulates low-carbon technology. And it incentivises behaviour change. Without a substantial green tax shift, the UK government's 2020 targets for CO2 reduction will never be met.

Green tax is good for jobs, too, since it does not tax labour. So, if taxes have to shift from bad to good and increase, it will be a positive for employment, which will be key - and not least because both public opinion and government action are still miles from where they need to be. The other critical area is financial regulation. The financial sector is currently too short-term and, as Adair Turner admitted, much of it is "socially useless".

There needs to be a refocus, too, on investment decisions towards long-term sustainable goals rather than short-term unsustainable gain.

We know the task ahead is huge. And it needs planning. We need to ask today what we want in 2050 and work backwards. We need to envisage another kind of society. A new lifestyle and entirely new ways of living. It's not the end of history but it certainly needs to be the end of the old society.